NY Fed to run repo test to prepare for eventual bond sales

NEW YORK Wed Jan 16, 2013 11:19am EST

NEW YORK Jan 16 (Reuters) - The U.S. Federal Reserve's trading desk is set to execute a series of small-value repurchase agreements as a test to ensure the little-used process will work when the central bank finally decides to reverse its easy monetary policies.

The Federal Reserve Bank of New York, which handles the U.S. central bank's open market operations, including the purchases of some $2.5 trillion in bonds over the last few years, said on Wednesday the test is "a matter of prudent advance planning" and does "not represent a change in the stance of monetary policy."

In a repurchase agreement, or repo, the New York Fed buys a U.S. Treasury bond or mortgage-backed security (MBS) under an agreement to resell it in the future. Repos would help the Fed lower its balance sheet, which is now worth about $3 trillion and growing.

The Fed Bank did such a test in August, 2012, and said on Wednesday it intends to do another "in the near future." The trades would be done at current market prices and would be designed to have no effect on rates or reserves, it added.

The central bank has taken aggressive steps to boost the battered U.S. economy during and after the 2007-2009 recession, including three rounds of quantitative easing, or QE, in which it bought Treasuries and MBS to lower longer-term yields and spur hiring and investment more generally.

The Fed currently buys $85 billion in these bonds per month. Minutes from the last Fed policy meeting, however, revealed that several top officials expected to slow or stop the program this year, setting off recent debate over how long QE3 it will last.

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